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Microsoft is making a "big bold bet" on Web services, which it sees as the most important technological development of the next decade, Chief Executive Steve Ballmer said on Tuesday.

But the software company, whose online division is losing money while
rivals like Google thrive, has a unique vision of how these new services
will evolve.

Microsoft believes Web services will work in tandem with PC-installed
software, a vision that differs from that of "software as a service"
advocates, such as Salesforce.com and Google, who expect services
delivered over the Web to replace traditional software.

"We believe this shift is the most important technological transformation
during the next decade," Ballmer said at the company's annual shareholder
meeting.

Microsoft has invested heavily to expand data centers to house servers and
provide the infrastructure to host blogs, e-mail services for small
businesses and a slew of other new Web services as part of its "Live"
strategy.

Calling Microsoft a company with multiple core businesses, Ballmer said
its online services group is the software giant's "fourth core" in
addition to desktop software, computer server software and its
entertainment initiatives.

Google has already encroached on Microsoft's Office desktop turf with
online spreadsheet and word processing software, while Microsoft's own
Office Live lets small businesses set up Web sites, company-branded e-mail
and Web applications to allow project management and collaboration.

Office Live is free for the ad-supported basic offering and Microsoft
charges a monthly subscription for the more elaborate version. It works
with the Office software suite but the programs are largely different from
those on the desktop.

Having dominated the desktop with Office and its Windows operating system,
Microsoft arrived late to the online services game and allowed smaller,
more nimble competitors such as Web search leaders Google and Yahoo to
build billion-dollar businesses around ad-supported Web services.

Microsoft's desktop business accounts for more than half of its $44
billion in annual sales and most of its profits.

But its online services group lost $136 million in the three months ended
September 30 as sales fell 4 percent to $539 million, due to a decline in
its Web access business and investments to add staff and expand data
centers.

By contrast, Google, which makes nearly all its money from advertising,
made a net profit of $733 million last quarter and revenue surged 70
percent from a year ago to $2.69 billion.

Microsoft took the wraps off its Windows Live search engine in September,
but it has made few inroads against Google, which is so closely associated
with online search that its name is also a verb in the dictionary.

Microsoft rolled out a software system called adCenter in the United
States this year to centralize advertising revenue for its ad-supported
online services. Ballmer noted the company has introduced 20 online
services in the last year alone.

Still, analysts say don't expect results overnight. It was only a year ago
that Microsoft co-founder Bill Gates called the company to arms in a memo,
calling for a new approach to handle a "sea change" from online services.